A COMPUTABLE GENERAL EQUILIBRIUM APPROACH TO TRADE AND ENVIRONMENTAL MODELLING IN THE MALAYSIAN ECONOMY

Environmental pollution is now a serious problem in many developing countries. One approach to mitigate the problem is to implement various pollution control policies. However, due to a lack of adequate quantitative models, the economic impacts and effectiveness of many pollution control policies are still unknown. Therefore, there is a greater need to know whether economic liberalization, trade, environment and social welfare can be joined in one direction under environmental taxation and policies. Empirical studies for developed countries reveal that imposition of a carbon tax would decrease CO2 emissions significantly and might not dramatically reduce economic growth. To our knowledge there has not been any research done to simulate the economic impact of emission control policies in Malaysia. Studying the potential economic impact of emission control policies is very important because inappropriate policies that reduce carbon emission may at the same time reduce highly economic growth. It is thus important to find the correct pollution tax that could be imposed such that environmental pollution is reduced at the same time does not dampen economic growth. The method developed for this study is applied computable general equilibrium model (MYCGE) for imposing environmental taxation policies in the Malaysian economy. Three simulations were carried out using a Malaysian Social Accounting Matrix. The first simulation is related to the trade based and the last two are carbon based simulations. The model results indicate that further trade liberalization is not sensitive in the Malaysian economy. Particularly, the reasons could be attributed to the fact that Malaysian export duty is already low and Malaysian trade policy already highly liberalized. The carbon tax policy illustrates that a 1.21 percent reduction of carbon emission (via carbon tax) reduces the nominal GDP by 0.82 percent and exports by 2.08 percent; a 2.34 percent reduction of carbon emission reduces the nominal GDP by 1.90 percent and exports by 3.97 percent and a 3.40 percent reduction of carbon emission reduces the nominal GDP by 3.17 percent and exports by 5.707 percent.